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Don’t Mourn, Privatize

APF Fellow

All former communist countries share 45 years of a strong central institutional system which managed the economy as well as most other aspects of life. Today, what was once the regional imperative of “collectivization” has been replaced with the similarly urgent push for “privatization.” From large hopeless smokestack industries to medium-sized agricultural concerns to small store, front businesses, the key to prosperity, the binding force for the transition to a democratic pluralistic society, is seen to be economic reform. Removing assets previously held by the state and placing them into private hands may sound simple enough, but as Mihaly Laki, an economist with the Economic Institute and an advisor to the opposition party the Free Democrats, points out, “Me situation of privatization is terribly confused and there is no clear answer that demonstrates if the program is succeeding or failing. “The real story of privatization is that no one is sure. of what to do or what will come next.”

Each country copes with its own overlays of complications. The split of what was once the Czech and Slovak Republic has thrown its many faceted economy into uncertainty. Heavy emphasis on privatization is expected to shift as the programs and plans of Slovakia’s leader, the more left-leaning Vladimir Meciar, clash with those of the new Czech leader and former economic reform guru Vaclav Klaus. Though Poland may have been the leader in economic shock therapy, the unrelenting series of political crises have impeded progress. Romania, Bulgaria and Russia-not to mention the other former Soviet Republics- have made still less progress in the transformation of ownership.

Since 1989 a central paradox of freedom has emerged: while democracy can be declared in a day, a republic announced in a minute, free elections held over a weekend, the transition to a market economy, and the psychological transition to independence from the state takes very much longer.

Hungary’s transition differs from that of its COMECON neighbors because the former communist government bad set up the structure for a market economy. Hungary began limited economic reform efforts in 1968 with the New Economic Mechanism. Although stalled as a result of the crisis in Czechoslovakia, the NEM nonetheless established a curious economic hybrid that became known as “goulash communism” or “market socialism.” Its goal was to introduce market or quasi market mechanisms while continuing to retain the dominance of state ownership, The NEM created a second economy in which nearly everyone held a second private sector job. It was the predecessor for more radical economic reforms spearheaded by the last Communist government in 1988. Throughout the Eighties, many Hungarians enjoyed the mixed benefits of being Eastern Europe’s most vital consumer society. New VCRs, home computers, western television sets and stereo systems, and small summer houses were the benefits of living in the late communist period. And yet, not only did the life expectancy for a Hungarian man drop by five years but, as President Arpad Goncz said immediately before taking office in 1990, “The major difficulty of the transition in Hungary is that. here people have a lot to lose.” Hungary was no Poland or Romania plagued by shortages of basic food items. Hungary was prosperous; Hungarians travelled. Hungary was the “most comfortable barracks on the Bloc.”

Today, Hungary has absorbed nearly half of the West’s investments in the East. In a region of massive political and social instability, 10.5 million Hungarians in Hungary enjoy relative calm. But 40% of the households live near poverty and in a recent survey the normally pessimistic Hungarians reached a new low in morale. Sixty percent said that Hungary is in a worse position now than before the elections of 1990. Industrial production has declined by 20% and personal consumption by 10% in less than two years. The homeless population in Budapest has reached 50,000. Most are men from the countryside who worked at a factories, lived in factory dormitories, were laid off and lost their home. Newspapers are full of stories about women unable to feed their children and pensioners only able to afford meat once a month; not surprising given that over the last five years the value of their pensions fell by 50%. Unemployment, which was a mere 2% at the beginning of 1991, is now at 10% and rising.

What happened? Put simply: bad timing.

No one could have predicted the difficulties of the transition, because no one could have predicted the totally transformed international political landscape. “In 1988 and 1989 when all of this began,” said economist Mihaly Laki, “we. were much more optimistic. We assumed that Poland and Hungary would have special status in the West and receive both financial and technical assistance. And no one dreamed that the Soviet Union would completely collapse. Now Hungary is only one of 20 or 30 post communist countries asking for help. But we are a small country and not so important to the West. Plus, there is an international recession and our greatest market collapsed with the Soviet Union.”